WASHINGTON - Today, the Treasury Department issued a newly revised U.S. Model Income Tax Convention (the “2016 Model”), which is the baseline text the Treasury Department uses when it negotiates tax treaties. The U.S. Model Income Tax Convention was last updated in 2006.
“The 2016 Model is the result of a concerted effort by the Treasury Department to further our policy commitment to provide relief from double taxation and ensure certainty and stability in the tax treatment of treaty residents,” said Deputy Assistant Secretary for International Tax Affairs Robert B. Stack. “The 2016 Model includes a number of provisions intended to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance,” he added.
Many of the 2016 Model updates reflect technical improvements developed in the context of bilateral tax treaty negotiations and do not represent substantive changes to the prior model. The 2016 Model also includes a number of new provisions intended to more effectively implement the Treasury Department’s longstanding policy that tax treaties should eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance. For example, the 2016 Model does not reduce withholding taxes on payments of highly mobile income—income that taxpayers can easily shift around the globe through deductible payments such as royalties and interest—that are made to related persons that enjoy low or no taxation with respect to that income under a preferential tax regime. In addition, a new article obligates the treaty partners to consult with a view to amending the treaty as necessary when changes in the domestic law of a treaty partner draw into question the treaty’s original balance of negotiated benefits and the need for the treaty to reduce double taxation. The 2016 Model also includes measures to reduce the tax benefits of corporate inversions. Specifically, it denies reduced withholding taxes on U.S. source payments made by companies that engage in inversions to related foreign persons.
The Treasury Department has been a strong proponent of facilitating the resolution of disputes between tax authorities regarding the application of tax treaties. Accordingly, the 2016 Model contains rules requiring that such disputes be resolved through mandatory binding arbitration. The “last best offer” approach to arbitration in the 2016 Model is substantively the same as the arbitration provision in four U.S. tax treaties in force and three U.S. tax treaties that are awaiting the advice and consent of the Senate.
The 2016 Model reflects comments that the Treasury Department received in response to the proposed model treaty provisions it released on May 20, 2015. The Treasury Department carefully considered all the comments it received and made a number of modifications to the proposed model treaty provisions in response to those comments.Highlights mine. There is much to be discussed in this of course and I will make no attempt to be comprehensive here, but I made a quick comparison doc that might be useful; download here. Just at first glance: can you spot the BEPS? Action 6 is plainly at work, and probably others.
The Treasury Department is preparing a detailed technical explanation of the 2016 Model, which it plans to release this spring. The preamble to the 2016 Model invites comments regarding certain situations that should be addressed in the technical explanation for the so-called “active trade or business” test of Article 22 (Limitation on Benefits). See the preamble page 5. The deadline for public comments on this subject is April 18, 2016.
My current interest is in what I am calling the new "kill-switch" provisions, the special tax regime (art 3, 11, 12, 21, 22) and subsequent law changes (art 28) provisions alluded to in the bold highlighted text above. I'm working on a paper on this subject and will have more analysis soon.